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Real estate income (NYSE:O) has been a reliable dividend stock for long-term investors. It is one of the largest real estate investment trusts (REITs) in the world, pays monthly dividends and has increased its payout 128 times since its IPO in 1994. Its forward yield of 6% is also much higher than the current yield from the Treasury to 10 years. of 4.8%.
But should investors expect real estate income to generate millionaire gains over the next decade? Let’s review their business model and historical returns to find out.
As in Retail REITRealty Income buys many commercial properties, rents them out, and splits the rental income with its investors. REITs must distribute at least 90% of their pre-tax profits to investors as dividends to maintain a favorable tax rate.
At the end of the third quarter of 2024, Realty Income owned 15,457 properties in all 50 states, the United Kingdom and six countries in Europe. That’s up from the 13,458 properties at the end of 2023, as it gained many new properties through its acquisition of Spirit Realty in January 2024. Realty Income primarily leases its properties to recession-proof retailers. Its main tenants include Dollar General (which represented 3.3% of its annualized contracted rent in the third quarter), Walgreens (3.3%), dollar tree (3.1%), and 7-Eleven (2.5%).
Some of Realty’s largest tenants, including Walgreens and Dollar Tree, have struggled with slow sales and store closings in recent years. But it consistently offset that pressure by providing more leases to its strongest retailers, and its occupancy rate has never dropped below 96% since its public debut. It closed the first nine months with a healthy 98.7% occupancy rate, compared to rates of 98.6% in 2023 and 99% in 2022.
REITs typically report their earnings growth through their adjusted funds from operations (AFFO) per share, rather than its earnings per share (EPS). From 2013 to 2023, Realty Income grew its annual AFFO per share at a compound annual growth rate (CAGR) of 5%, even as the market was affected by the pandemic, geopolitical conflicts, inflation and increasing rates.
It expects its AFFO to grow 4% to 5% to $4.17 to $4.21 per share by 2024. That should easily cover its forward annual dividend rate of $3.17 per action
Over the past 20 years, Realty Income shares are up 173%. It might not look that impressive, but it generated a total return of 732% after including its reinvested dividends. This rally would have turned a $10,000 investment into about $83,200. During this same period, the S&P 500 achieved a total return of approximately 680%.
